New Reporting Rules for Trusts in Canada: Capturing Bare Trusts

February 24, 2024

Sector:

In a significant shift in tax policy, Canada has introduced changes to the reporting rules for trusts, specifically targeting bare trusts. Historically, bare trusts were not required to file a T3 Trust Income Tax and Information Return. However, with the new regulations coming into effect for tax years ending December 31, 2023, this is set to change.

Understanding Bare Trusts

A bare trust, also known as a simple or naked trust, is a basic trust arrangement where the trustee holds legal title to the property, but the beneficiary retains all rights and responsibilities. A bare trust relationship can occur when the legal title holder (trustee) and the beneficial owner of the asset are not the same person. The trustee has no discretion and must act on the beneficiary’s instructions. Until now, these trusts were largely invisible to tax authorities due to their simplicity and the lack of a filing requirement.

Bare trust relationships can be found in various contexts, including but not limited to:

• In-trust-for (ITF) account for minor children or grandchildren, or
• if a person is added to an elderly parent’s investment account, bank account, or put on title for real estate for ease of administering their elderly parent’s estate, or
• in the case of corporations, title is held by a bare trustee corporation in bare trust for a different entity as a beneficial owner (for privacy or liability reasons).

Spence Walker, Partner at Kreston GTA comments that “In many cases, a bare trust document such as a trust deed may not exist. If a trust relationship was intended, a trust document should be created to evidence this. Otherwise, putting someone on title may imply a sale of a portion of the property which may have unintended tax consequences.”

Implications for Trusts

The new reporting requirements have several implications for these trusts:

1. Increased Compliance: Trusts that previously did not have to file a return will now need to ensure compliance with the new rules. This includes maintaining proper records and filing annual T3 Trust Income Tax and Information Return, which is due 90 days after the tax year-end.
2. Privacy Concerns: Some individuals may be concerned about the increased disclosure of personal and financial information to the CRA.
3. Tax Planning: The changes may impact tax planning strategies, especially for those using bare trusts for real estate or other investments.

Walker explains that “under these rules, beneficiaries include persons who currently have a right to income or capital as well as those having residual or contingent interests. As a result, some beneficiaries might not know that they have an interest in the trust, which could cause issues when collecting information from them.”

If a T3 Trust Income Tax and Information Return is not filed, the bare trust could face harsh penalties which is a sum equal or greater to the amount of (1) $2,500; or (2) 5% of the highest fair market value of the trust property, whichever is higher.

Walker notes that “for the 2023 taxation year, CRA is providing a temporary relief from penalties for bare trusts that file late; the filing requirement nevertheless remains and we advise not filing later than the next filing due date.”  He goes on to say “these changes may be confusing or overwhelming, but rest assured that Kreston is here to support clients throughout this process. Its important to get in contact with us soon, to assess the circumstances and begin gathering the necessary information.”

Conclusion

The inclusion of bare trusts in the T3 Trust Income Tax and Information Return filing requirements marks a significant change in Canada’s tax landscape. Trusts that were previously exempt from reporting will now need to ensure they comply with the new rules. This move towards greater transparency and accountability is likely to have far-reaching implications for trust management and tax planning in Canada.

About Kreston GTA:

Kreston GTA is a leading accounting and advisory firm based in Toronto, Canada. The firm offers a wide range of services, including tax planning, audit and assurance, business advisory, and more. With a commitment to excellence and a client-focused approach, Kreston GTA is dedicated to helping businesses and individuals achieve their financial goals.

About Spence Walker

Spence Walker is a Partner at Kreston GTA, known for his expertise in accounting, audit, and tax services. With a keen eye for detail and a strategic approach to financial management, Spence has earned a reputation for delivering exceptional results for clients across a range of sectors. His commitment to excellence and client-focused mindset have been instrumental in building long-lasting relationships and driving success. As a leader at Kreston GTA, Spence’s innovative thinking and collaborative style continue to contribute to the firm’s growth and reputation in the industry.